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Home Equity Loans

What are the Benefits of a Home Equity Loan?

Are you trying to make a big life change but need a little financial help? With all the financing choices out there it can be challenging to find the right loan or credit option for your situation. Discover how a home equity loan can help you reach your goals, simplify your debt or transform your home below.

What are the benefits of a home equity loan?

  • Lower interest rates: Home equity loans typically have much lower interest rates than credit card APRs. This type of loan is considered “secured” by the collateral of your home, so lenders are more confident in your ability to pay your debt. Lower risk means lower rates.
  • Potential tax deduction: 100% of your home equity loan interest payments may be tax deductible, which may not be the case with credit card debt. Consult your tax advisor to see if you qualify.
  • Cash payment: Unlike lines of credit, a home equity loan provides a lump sum of money. This allows you to knock out medical bills, contractor costs or other major expenses with one check.

What situations are good for a home equity loan?

Home Improvement

A home equity loan can help you renovate your home and reinvest in your property value. Whether you want to create an addition for your growing family or finally design your dream kitchen, you can use the equity you’ve earned over the years to make it happen. If you want to make a smart investment take the time to research which projects have the highest rates of return and your local property values. Knowing that a kitchen remodel typically has an average return on investment of 81.8% could persuade you to tackle that project over installing custom closets that may not fit a potential buyer’s taste when you go to sell¹. Also research the top-end home property values in your area. If your home is already worth $200,000 and the nicest house on the street sold for $230,000, putting a $100,000 addition onto your home could price you out of the market.

Debt Consolidation

If you’re paying high interest rates on multiple credit cards a home equity loan may be able to help consolidate your debt and simplify your finances. Home equity loans typically have lower interest rates than credit card APRs so you can lower your monthly payment. Also, this low interest rate is fixed so you know exactly what you have to pay each month, unlike with variable rate loans or credit cards that can raise APRs or add annual fees. Home equity loan interest payments may also be 100% tax deductible, which may not be the case with personal loans or personal credit card interest payments. Consult your tax advisor for complete information.

Pay for Major Expenses and Life Events

Do you have a big bill looming? Instead of taking out a personal loan or racking up credit card debt, consider a home equity loan. Whether you want to pay for a beautiful wedding or have an unexpected major expense, the hard work you put into your home can help.

Is a home equity loan ever the wrong financial tool?

While a home equity loan is a smart financial move in many situations, there are some instances where another financing option is a better solution.

  • Short-term expenses: If you use a 15-year home equity loan for a short term expense you may pay more in interest over the long term, even though your monthly payments will be lower.
  • Looking to sell: If you sell your home, any home equity loans will need to be repaid immediately on sale. If you used the money to upgrade your home and can pay off the debt with the additional equity in the sale (plus some extra in your pocket), that’s an excellent use of this type of financing. But if you are hoping to sell your home soon and need a loan for debt consolidation or a major expense, you may want to consider a different option.
  • When a lower rate is available: Home equity loan rates are very competitive but there are some instances where lower financing rates are available. For example, if you want to pay for your child’s college tuition and they are qualified for a low-interest federal student loan, taking out the federal student loan may be a better choice and may offer other borrower benefits.

Every path has benefits and drawbacks so it’s important to thoroughly understand. To learn more about using a Discover Home Equity loan, call your Personal Banker at 1-855-361-3435 today.

Resources:
¹http://www.houselogic.com/home-advice/home-improvement/home-remodeling-projects-with-long-term-ROI/?

Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

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